It’s been a difficult 3 months for the economy to say the very least. In the span of 4 months, we’ve seen war in Ukraine break out, successive 7+ % inflation reports, new pressures added to an already broken global supply chain, a fall in stock levels to the point of reaching bear market territory, and record gas prices. To make all this worse, the Federal Reserve has increased rates 3x in 3 months totaling 150 basis points – or 1.5% – pushing the cost of credit to 15-year highs. For context, the Federal Reserve has not increased the Fed rate at this rate since 1994 when median home prices were approximately a third of what they are today. As consumers contend with skyrocketing costs in housing and a rapid decrease in net worth (thanks to financial markets trading 30%+ less than Jan 1), the mortgage interest rates are peaking near the highest levels they’ve been since September 11th, 2001, all while home prices have ascended to unprecedented highs.
In a nutshell, homes have never cost more in US history. Outside of housing, the cost of living for all Americans are at record levels (think gas, groceries, healthcare, clothing etc.). The stock market is experiencing its worst regression since the crash of 2009. And now, the mortgage interest rates are pushing 6-7% territory. Though the writing has been on the wall for over 1 year, this all happened within the span of a few months which is incredibly fast. It feels like the moment you wrap your head around the “new normal”, the “new normal” changes again. People are dizzy trying to understand all of this, and for good reason.
However, this window of time will not last.
The government needs to get a handle on inflation. I do not personally agree with the current approach this administration is engaged with to combat skyrocketing costs; however, something needed to be done so here we are.
How is housing different?
Unlike your stock portfolio, there’s a utility factor to our housing market that cannot be underestimated as we look forward to understand where things are headed in these uncertain times. In most areas, housing remains red hot because supply levels are incredibly inadequate to match the demand. You need a place to live – you don’t need Apple stock. And right now there are millions of people who have not yet secured their next property given the past 2 years of bidding wars and. Most gainfully employed medium income earners will not live in crammed spaces as their needs grow, regardless of what their 401ks are doing.
The government chose the path of apathy on inflation issues while simultaneously pumping 6 trillion dollars into the economy over an 18-month period. They’re playing catch up, which will (temporarily) negatively impact the markets – including housing. That is essentially what we’re seeing today. We will likely see some twists and turns over the next 6-12 months before the situation stabilizes, and the outcome will likely result in a recession. However, given the demand and necessity for housing, home prices won’t be hurt nearly as bad as other parts of the economy. In many areas they won’t change at all. In some cases they will continue to rise.
With the economic fallout of a recession there will come renewed pressure on the Federal Reserve to once again look at cutting the benchmark rate to ease credit markets, which of course they will gladly do if history is any indicator. These high rates won’t last forever. Right now, we’re in the middle of an overcorrection by the government because of their unwillingness to do what was required over 1 year ago. Yet overcorrections don’t equate to normal, and this window of time will be old news at some point. Housing will continue to be a bright spot as we move through shifting economic sands.
To all buyers – be ready to creatively approach financing given the interest rate climate. Ask for seller credits to buy down your rate and remember you will again soon enough have an opportunity to refinance once rates drop. There might be some buying opportunities on certain homes over the next 6-12 months but don’t expect that to last.
To all sellers – inventory levels remain a big problem. If you have a nice property, you will still find a buyer to pay you a near record price for your home. Housing markets are far different than stock markets. Today millions of buyers are searching for homes and many will pay you handsomely for the opportunity to take it off your hands.